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Gold Update

August 2012

Gold update
Gold’s performance reflects continued challenging economic climate

Global gold demand in Q2 2012 was 990.0 tonnes (t), down 7% from the 1,065.8t in Q2 2011 according to the World Gold Council’s Gold Demand Trends report. This dip in demand was partly due to the comparison with exceptional demand last year, and also reflects the challenging global economic climate. In this context, gold performed as expected, acting as both a store of value and a source of liquidity.

In value terms gold demand remained relatively stable year on year at US$51.2 billion, compared to US$51.6 billion in Q2 2011. During the quarter, the average price of gold was US$1609.49 per ounce, 7% higher than the average for Q2 2011.

The key findings from the report are as follows:

  • In India, investment and jewellery demand fell to 181.3t, down from 294.5t in Q2 2011. At 56.5t, investment demand was less than half the level in Q2 2011. Indian jewellery demand also experienced a noticeable drop to 124.8t, down 30% year-on-year from 179.5t. These marked declines were partly a reflection of the strength of demand in Q2 2011 and also driven by Indian investors taking advantage of the weak rupee against the US dollar. The fluctuations in the exchange rate and the rise in the gold price to records of around Rp30,000/10g in June were compounded by domestic inflation and concerns over a weak monsoon season.
  • China’s investment and jewellery demand was 144.9t, down 7% from 156.6t in the same quarter last year. Investment demand fell by 4% year-on-year to 51.1t as Chinese investors exercised restraint in response to the lack of direction exhibited by the gold price. The lack of sustained upward momentum in the gold price and the slowing of domestic GDP also discouraged consumers from buying gold jewellery, which saw a 9% year-on-year decline to 93.8t.
  • The ongoing sovereign debt crisis in the Eurozone underpinned European investors’ enduring conviction in gold’s capital preservation properties. Demand for bars and coins from retail investors posted a 15% year-on-year increase to 77.6t; 19% higher than the five year quarterly average of 65.2t.
  • Official sector demand in the quarter reached a record high of 157.5t, more than double the level of Q2 2011 and accounting for 16% of overall global demand. Central banks that bolstered their holdings during the period included the National Bank of Kazakhstan, and the central banks of the Philippines, Russia and Ukraine.
  • Despite a difficult economic background, ETFs were relatively resilient, recording net outflows of 0.8 t year-on-year

Marcus Grubb, Managing Director, Investment at the World Gold Council said:

Gold’s performance reflects the continuing challenging economic climate. A softness in India and China, who between them represent over 45% of the total second quarter jewellery and investment demand accounts for much of the slowing of global gold demand.

However, through all the uncertainty, it is clear that gold’s fundamental properties as a vehicle for capital preservation and a source of liquidity continue to endure. This is evident from the activity of central banks, the ultimate long term investors, which continue to increase their gold holdings to diversify reserves and protect against reliance on one or more foreign currencies."

Gold demand and supply statistics for Q2 2012:

  • Second quarter gold demand of 990.0t was down 7% in comparison to Q2 2011.
  • The value measure of gold demand was 1% lower year-on-year at US$51.2bn.
  • The average gold price of US$1,609.49/oz was 7% above the average Q2 2011 price.
  • Demand in the jewellery sector of 418.3t was 15% lower than 490.6t in Q2 2011, excluding India and China jewellery demand was down by 4%.
  • Investment demand fell by 23% year-on-year to 302.0t, slightly below the 5 year quarterly average of 340.3t. Excluding India and China, retail investment demand was up 16% year-on-year in tonnage terms.
  • Demand for ETFs and similar products in Q2 2012 was broadly flat over the course of the quarter, as new demand was marginally outweighed by selling.
  • Second quarter demand for gold in the technology sector totalled 112.2t, 5% down on Q2 2011.
  • At 1,059.1t, the supply of gold contracted 6% year-on-year, primarily due to a reduction in recycling activity.

Whilst every effort has been made to ensure the accuracy of the information in this document, Amante Jewellery cannot guarantee such accuracy. Furthermore, the material contained herewith has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient or organisation. It is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any commodities, securities or related financial instruments. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein. Amante Jewellery does not accept responsibility for any losses or damages arising directly, or indirectly, from the use of this document.

.June 2009 - click here to view

June 2009

Gold updateFresh Gold Price Highs Possible This Year Thanks to Inflation Driven Surge in Gold Investment

Growth in investment demand has been the primary driver of the rally that has taken gold from around $250 in early 2001 to peaks above or close to the $1,000 level in 2008 and 2009. This phenomenon is clearly reflected in GFMS’ data on World Investment - the sum of implied net (dis)investment, official coins, bar hoarding, and medals and imitation coins. For instance, during the 1993-2000 period, World Investment averaged 383 tonnes per annum, whereas over 2001-2008 it averaged 707 tonnes each year.

In approximate value terms, this represents a steeper jump from an annual average of just $4 billion to nearly $12 billion per annum.

This change has been primarily driven by booming investor interest in gold, a result of: the general decline in the US dollar since 2002; rising commodity prices (at least until mid-2008); concerns over the security of bank deposits following the near meltdown of global financial markets; more recently, the drop in short term interest rates to levels close to zero in the major advanced economies and growing concerns at the potential longer term inflationary consequences of unprecedented monetary and fiscal policy easing. The contrast between this economic and financial backdrop compared to that prevailing in the mid and late 1990s is stark. Back then the economic environment was characterised by low inflation, high real interest rates and an extraordinary bull market in equities.

Looking at what one might term the more “western” component of investment, which includes the implied elements and much of official coin demand, the change between these two periods is yet more remarkable. As the graph below illustrates, “western” investment (defined for simplicity as the sum of these two elements) rose from an annual average of just 104 tonnes in 1993-2000 to no less than 403 tonnes in 2001-2008. Conversely, investment demand from the “rest of the world” (for the purposes of simplicity, here restricted to bar hoarding plus medals and imitation coins) remained relatively stable, with the annual averages increasing only modestly between these two periods from 279 tonnes in 1993-2000 to 304 tonnes in 2001-2008.

This difference is not surprising because “western” investment, which essentially covers just Europe and North America, tends to be greater at times of higher and rising prices, while the Asian markets (broadly defined), which account for much of bar hoarding and medals and imitation coins demand, generally tend to see much stronger buying on lower or declining prices. Put otherwise, “western” investment tends to drive prices (higher or lower) whereas demand in the rest of the world generally tends to support a floor – although as has been seen over 2001-2009 - to date, a floor that is at successively higher price levels.

Looking at the second half of 2009, investment demand, and especially its “western” elements, which include activity in ETFs, futures and the over-the-counter market, is expected to remain the driving force behind gold price movements. Given increasing fears over the long-term inflation threat in western countries, we expect World Investment to see a massive increase this year, particularly from its implied net investment and official coins components. Indeed, GFMS forecasted in its May Quarterly 3-Year Gold Forecast that World Investment this year will exceed 1,500 tonnes or approximately $47billion, in the process carrying the price to new peaks in the second half of this year.

.March 2009 - click here to view

The Impact of the ‘Credit Crunch’ on The Industrialised World’s Jewellery Consumption

Gold updateIntroduction
Reviews of gold jewellery consumption typically focus on the price sensitive countries of the developing world, in particular India, because of their marked swings. The industrialised world’s more stable consumption, however, is still worthy of analysis. Firstly, it remains sizeable, at around 600 tonnes last year, and has the scope for massive change, having roughly halved since its early 1990s peak. Secondly, its relatively price insensitive nature means it has the active ability, at least in theory, to boost or undermine gold prices. The above implied demand loss of almost 600 tonnes had three main causes - background structural changes, higher and more volatile gold prices, and recent macro-economic problems. The explanation and importance of each follows.

Structural Trends
Consumption in the industrialised world has been falling since 1992. That it has done so in a smooth manner supports our belief that the bulk of losses were due to secular changes, such as market share loss by all forms of jewellery to other areas of discretionary spending, such as consumer electronics. Another example is consumers choosing to devote an ever greater percentage of expenditure when buying jewellery to elements other than precious metals, whether physical (such as diamonds) or intangible (such as the perceived value of a branded item). The long term slip in average weights also means more spent on labour charges as these on lighter pieces are higher per gram. On top of this, there has been market share loss by gold to other precious metals in several markets. (This does not imply the value of gold jewellery sales have been falling; a simple multiplication of the fine weight by the average price shows a strong uptrend in value, and margins have also trended upwards.)

The Gold Price Rally
Structural changes, however, cannot explain the acceleration in the decline from 2006. Instead, it seems fair to blame much of this on the gold price rally. Much of the resultant damage was transmitted via the trade’s management of margins as great attention has been paid to shaving the weight of gold to keep pieces below key price points, by switching from solid to hollow items and so on. There has also been an intensification of structural trends, for example incorporating more non-metal elements, such as small, inexpensive diamonds to boost apparent value.

The Financial Crisis
Whilst the gold rally was largely due to recent financial troubles, there are direct links between falling jewellery consumption and the recent financial and economic crisis. Our quarterly consumption series show a fairly clear acceleration in the pace of recent losses and, while steeper falls in say late 2007 coincided with rapid price gains, the yet steeper drop in the fourth quarter of 2008 was in tandem with lower prices, implying other factors being at work. Monthly data shows a yet clearer link to non-price factors. The decline in US gold jewellery imports, for example, sped up markedly from March 2008 yet prices were then easing. Changes in consumer spending or confidence instead look more relevant.

That the pace of consumption losses has sped up is partly due to greater efforts to minimise gold use, such as the recent more pronounced move to lower carats. There has also been further market share loss by gold to other metals, such as the US market’s shift to high end silver jewellery. That move’s focus on value, not weight, helps explain why silver’s losses globally to other forms of jewellery, such as steel, may have outweighed the gains through migration from gold. As a result, silver also suffered accelerating losses last year in the industrialised world, although on a lesser scale than gold. Gold benefited through substitution from platinum but this was largely just in the first half of 2008, when gold’s discount was over $1,000/oz, and was centred on the more price sensitive Chinese market.

A Conclusion
The impact of financial turbulence can be assessed by estimating how large industrialised world consumption might have been if it only had to face structural change. One method is to apply the average annual drop in the period 1996-2005 of around 2% to the years from 2006 to 2008. If annual losses then had been that modest 2%, jewellery consumption in 2008 would have been some 200 tonnes higher than our current figures. Given that economic problems are recent, it is probably fair to blame the bulk of these non-structural losses on the price. However, for 2008 alone a roughly equal billing for the two is perhaps a better stance, given the jump in the scale of the drop.

Looking ahead, further losses look hard to avoid, given bleak economic prospects, strong prices and ongoing secular changes. The exact scale of consumption’s drop will chiefly be a function of the first two but it is easy to envisage a scenario in which losses in 2009 head for 100 tonnes.

.June 2008 update - Click here to view

The first quarter of 2008 saw gold in a bullish mood, as it charged past the previous record of $850 in 1980 to achieve an all-time high of $1,011.25 on 17th March. An abrupt correction left the end-quarter price at $933.50 but the overall average quarter price was also a record, at $924.83. In contrast to the fourth quarter, when gold prices in other currencies did not keep pace in percentage terms with the dollar price, gold prices in other currencies typically saw notable increases in the first quarter. The rupee price rose by 18% quarter-on-quarter, mirroring the US dollar percentage increase, whilst the rand price surged by 31%.

The increase in the gold price was primarily due to the sustained inflow of investor funds, as investors turned to gold as a safe haven. There were a combination of factors behind this move to perceived safer ground, not least of which were the heavy losses reported by major banks, and the collapse of Wall Street giant Bear Stearns. In addition, the fact that the greenback dropped to a record low against the euro, and oil and food prices continued to escalate, further helped to turn investors towards the yellow metal. It also remained an attractive investment against a potential slump in equity values in the event of a slowdown of the US economy; some spectators suggest that a recession in the United States had already started.

Source: Societe Generale and GFMS Ltd

Prices (quarterly average change)

Change QoQ

US$/oz spot


US$ 12-mth


















Source: Reuters EcoWin, GFMS

.February 2008 update - Click here to view
Publication of Gold Survey 2007 - Update 2
GFMS Limited - January 2008

Gold at $1,000 “A Clear Possibility” in 2008 as Investor Enthusiasm Pushes Aside Forecast Slump in Fabrication & Higher Scrap

Gold updateA key aspect of the GFMS Update being gold is expected to average US$840 over the first half of 2008, with further increases indicated as a possibility for later in the year. GFMS commented, “investor appetite for gold at the moment seems undimmed and this should push gold higher over the year. Predicting the top is never easy but we always thought the US$900 barrier could easily fall quite soon and then we have to start viewing US$1,000 as a clear possibility for later this year”.

GFMS expects the surge in investment to be driven by those factors that fuelled the boom in the final four months of 2007. Namely, a weak US dollar, record oil prices and their inflationary consequences, the US sub-prime crisis and its threat to GDP growth in the United States, and perhaps elsewhere, and lastly geopolitical tensions.

GFMS does caution, however, that a short to medium term correction is possible, chiefly because of the speed of the recent price rise and the huge fund overhang on Comex. Should a retreat occur, it is thought a slide back to the low US$800s might occur. But that’s still up almost 30% year-on-year and, with this period of consolidation out the way that’s when we should see the convincing drive towards US$1,000 per ounce”.

GFMS believe that investment should still be in a position to easily drive prices higher with poor demand elsewhere thanks to a relatively limited supply reaction. Mine production, for example, is forecast to increase, but by only a few percent. In contrast, official sector sales are expected to slip and that result is chiefly driven by changes to sales by signatories to the Central Bank Gold Agreement - gross purchases outside this group are thought likely to remain modest. GFMS added, “we’re not expecting any of the major US dollar holders to appear on the buy-side in a major way any time soon. But any whiff they were about to would no doubt be interpreted as strongly bullish”.

Supply Highlights
Mine production in 2007 fell by just over 1%, partly through delays to development and expansion projects. Output in the first half of 2008 is forecast to grow by just over 2%.

Global cash costs rose a dramatic 24% year-on-year for January-September and hit a record level just over $400/oz in the third quarter. The rise was driven by such factors as US dollar weakness, higher royalty payments and mine development work.

Net official sector sales in 2007 rose by a third to 488 tonnes. The rise was driven by sales from signatories to the Central Bank Gold Agreement (CBGA) returning to ‘normal’ levels after the low levels seen in 2006.

Old scrap supply contracted by almost a fifth to just under 900 tonnes. Scrap in the first half of 2008 is projected to increase by around 15% to safely over 500 tonnes.

Demand Highlights
Jewellery fabrication in 2007 grew by 5% though, in terms excluding scrap, it rose 11%...

Other fabrication in 2007 rose by 2%, thanks to gains for medals and electronics.

Producer de-hedging in 2007 rose by a provisional 14% to within a whisker of the 2004 record of 422 tonnes.

Bar hoarding rose by a modest 3% last year, despite major price-led second half losses, while official coin fabrication fell by 3%.

Whilst every effort has been made to ensure the accuracy of the information in this document, Amante Jewellery cannot guarantee such accuracy. Furthermore, the material contained herewith has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient or organisation. It is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any commodities, securities or related financial instruments. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein. Amante Jewellery does not accept responsibility for any losses or damages arising directly, or indirectly, from the use of this document.

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